By Seb Beloe, partner and head of research at WHEB Asset Management
There is an overlooked, little-discussed growth opportunity that should be of as much interest to long-term investors, like pension funds, as to ‘deep green’ Article 9 funds.
As the planet heats, and our own experiences of 40-degree British summer days or watching another high street flooded waist-deep becomes commonplace, so the companies designed to increase resilience against extreme weather events come to the fore.
Climate adaptation is an estimated £2 trillion per year market, driven largely by public sector spending. Local authorities need to manage increased flood, heatwave or wildfire risks across jurisdictions, including infrastructure.
While the UN Development Program estimates net benefits of 2-10-times per £1 of investment in adaptation themes, climate adaptation has been significantly under-funded and overlooked, even among Article 9 ‘deep green’ investment funds, in favour of climate mitigation investments, such as renewable energy stocks.
Climate resilience stocks
Innovative stocks are well-positioned to benefit in this environment. However, we consider some allocation to climate adaptation stocks is sensible, given that even in best-case scenarios, what we are currently living through are global temperatures and carbon emissions that require large-scale adaptation to many facets of our lives, our infrastructure and civic planning, and to business supply chains.
One stock we invest in is Dutch sustainable design, engineering, and consultancy company Arcadis. This flood risk specialist helped New York City’s local authorities re-develop the lower East side of Manhattan following the devastation caused by the 115mph Hurricane Sandy in 2012.
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They designed new parks to which flood waters would be channelled to and allowed to flood during hurricane events, for example, creating natural flood defences that protect people and higher-value assets such as homes and infrastructure.
Stocks like this go through the same rigorous bottom-up, stock-picking discipline as the mitigation stocks we hold (growth rate, profit margin, market share etc).
Business preparedness
Climate adaptation can also be considered in the context of business preparedness and resilience. For example, equity investors holding stocks with high dependence on a supply chain vulnerable to external threats such as geopolitical unrest should also consider environmental risks.
This could look like transportation issues affected by extreme weather, or legal and regulatory changes in response to weather events (such as reduced access to water during extreme heat events, which is especially critical for water-intensive manufacturing processes). It is not just the preserve of ‘green’ investment funds to consider these factors.
To what extent a ‘traditional’ investment fund considers climate adaptation as a means to de-risk their fund will likely rely on its ESG approach and screens (if used).
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We are certainly beyond the old complaints that low-carbon solution businesses are not investable due to lack of size or scale – some of the world’s largest and most profitable stocks are this, Tesla being one of them.
That said, investment managers holding stocks for the long-term would do well to consider the changing world in which those stocks are operating, along with their individual transition risks (such as policy or consumer change) and physical risks (to supply chain, manufacturing process etc).
Another climate adaptation stock we hold, Advanced Drainage Systems, is an industry leader in storm water management systems. As an investment, this means it is well placed to benefit from the increased demand from local authorities and commercial property owners to help manage increasing volumes and frequency of stormwater.
In addition, it is producing more sustainable piping using long-lived recycled plastic piping in place of concrete. These pipes are easier to install as well as being lower carbon and less likely to fracture. Consequently, the company is also taking share in this market.
Our hope is that portfolio managers, alongside advisers and their clients, see not just risks – but the plethora of exciting investable opportunities inherent in climate adaptation.
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